Current Challenges in the Banking Sector

 

Banking System –
Current Challenges and way Forward

Today, I had the privilege to address a group of employees of Bank of India in Chennai on the above topic. This was part of the workshop organised by Bank of India Staff Union for its active representatives, working in the bank branches across India. I am sharing some of the thoughts, that emerged in the meeting.

1. Challenges in a falling interest rate scenario, which is likely to continue.

a. Sourcing Retail Deposits: CASA accretion will be the most pressing one. Developing and enhancing the relationship with the existing customers may be a worthwhile strategy, while bringing in new customers. Pricing fixed deposits rates appropriately to ensure a balance between continuous inflow of deposits and minimum impact on NIM.

b. Grow advances: 
  (i) A proper mix of secured moderate yielding ones with unsecured, but safe high  yielding ones to maximise interest income as well as less need on provision requirements.
 (ii) An ideal CD ratio, say between 75-78% that helps optimum return on deployment of funds as advances and also ensures less impact on income, if there is a stress in the quality of advances.

·  c. Quality of Assets: Enhanced prudent appraisal, sanction, disbursal and follow up standards to eliminate fresh slippages and more provision requirements. 

    d. Capital Needs:  Match incremental capital needs, arising due to incremental risk weighted assets, through retained earnings and  CET 1 capital preferably, as the other forms of capital involve outflow of fixed regular interest expenses, irrespective of the changes in interest income.

· e. Technology Risk and Cyber Frauds: Enhance operational risk procedures including build up of security like added firewalls, 'thought through' testing standards before implementing system enhancements for all existing and new business initiatives.

   Additionally, the PSBs should meet the challenges of bringing in younger generation customers, maintain and improve market share in deposit and advances. They should also cross sell their banking products viz., deposit products to loan customers and vice versa. in addition to cross selling third party products.

  2. DICGC Premium should be risk based: Risk based premium on the basis of ratings assigned broadly as under

• AAA for PSBs and RRBs (Sovereign Guaranteed)
• AA for strong PVBs
• A for others where GNPA ratio is less than 2
• BBB - safe but GNPA ratio higher than2 but less than 3
• BB and below: All others with higher toxic loan percentage and GNPA ratio higher than 3
• The lower the grading, the higher should be the premium.

33.Capitalising PSBs adequately: Existing CAR to be maintained. Any shortfall in maintaining existing CAR arising on account of  incremental risk weighted assets, not matched by the retained earnings, should be infused by the central govt. The union budget should make a commitment in their mission statement.

Regards.

V. Viswanathan
CGM Retired
State Bank Group

10^th February 2025

Note: There was a query on the increasing gold loan frauds. 

I suggested the following six measures to address the issue:

•   KYC to be strictly adhered to
•   Staff expertise in gold ornament appraisal is a basic need.
•   Trustworthy gold appraisers with unblemished track record
•   Photo of ornament pledged with the customer signature in the photo document to be executed before the Joint Custodian
•   Updated gold carat verification instrument
•   Joint custodian actively discharging his duty as a checker